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A Radial Basis Function Scheme for Option Pricing in Exponential Lévy Models

Author

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  • Raymond Brummelhuis
  • Ron T. L. Chan

Abstract

We use Radial Basis Function (RBF) interpolation to price options in exponential Lévy models by numerically solving the fundamental pricing PIDE (Partial integro-differential equations). Our RBF scheme can handle arbitrary singularities of the Lévy measure in 0 without introducing further approximations, making it simpler to implement than competing methods. In numerical experiments using processes from the CGMY-KoBoL class, the scheme is found to be second order convergent in the number of interpolation points, including for processes of unbounded variation.

Suggested Citation

  • Raymond Brummelhuis & Ron T. L. Chan, 2014. "A Radial Basis Function Scheme for Option Pricing in Exponential Lévy Models," Applied Mathematical Finance, Taylor & Francis Journals, vol. 21(3), pages 238-269, July.
    • Handle: RePEc:taf:apmtfi:v:21:y:2014:i:3:p:238-269
    DOI: 10.1080/1350486X.2013.850902
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    Cited by:

    1. Anna Maria Gambaro & Nicola Secomandi, 2021. "A Discussion of Non‐Gaussian Price Processes for Energy and Commodity Operations," Production and Operations Management, Production and Operations Management Society, vol. 30(1), pages 47-67, January.
    2. Ron Tat Lung Chan, 2016. "Adaptive Radial Basis Function Methods for Pricing Options Under Jump-Diffusion Models," Computational Economics, Springer;Society for Computational Economics, vol. 47(4), pages 623-643, April.
    3. Chan, Tat Lung (Ron), 2019. "Efficient computation of european option prices and their sensitivities with the complex fourier series method," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    4. Yusho Kagraoka, 2020. "The Fractional Step Method versus the Radial Basis Functions for Option Pricing with Correlated Stochastic Processes," IJFS, MDPI, vol. 8(4), pages 1-13, December.

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